Federal student loan interest rates increased today as expected, rising from 3.86% to 4.66% for undergraduate borrowers whose loans will be disbursed between now and June 30, 2015. Unsubsidized graduate loans now carry an interest rate of 6.21%, and PLUS loans for parents and graduate students are 7.21%.
Everyone knew this was coming. Last year, President Barack Obama signed the student loan bill tying interest rates to the 10-year Treasury note, setting up years of increased rates (rates on the 10-year note are widely expected to continue rising). Students whose loans were disbursed between July 1, 2013 and June 30 of this year got the best deal.
Congress set federal direct undergraduate loans (subsidized and unsubsidized) to the high yield of the 10-year Treasury note at the last auction before June 1 plus 2.05 percentage points. For graduate loans, it’s the yield plus 3.6 percentage points, and PLUS loans are an additional 4.6 percentage points. (Those extra percentage points are supposed to cover the administrative costs of servicing the loans, according to Congress.)
These rates have plenty of room to grow, assuming this law holds over the next several years and the Treasury note interest rates continue to rise. Undergraduate loan interest rates are capped at 8.25%, graduate at 9.5% and PLUS at 10.5%.
Existing student loan borrowers’ interest rates remain unaffected, and the new rates remain relatively low: Prior to 2006, most federal student loan interest rates were variable, rather than fixed. Borrowers with unsubsidized loans disbursed between July 1, 2006 and June 30, 2010, paid 6.8% (undergraduate), 7.9% (graduate) or 8.5% (PLUS). Rates for subsidized loans were lower, but still higher than current rates available to undergraduates and non-PLUS loan graduate borrowers. Subsidized loans for graduate students are no longer offered.
For borrowers affected by the recent increase, there are a few things to think about: You should never accept more student loans than you need, and definitely not more than you can afford. If some of your previous federal loans carried lower rates, apply to consolidate upon entering repayment. There aren’t many options for refinancing, so if eliminating your education debt as soon as possible is a high priority, you’ll probably want to pay off loans with the highest interest rates first.
Before paying off student loans, consider your big financial picture. There are plenty of situations in which focusing on student debt shouldn’t be on the top of your to-do list, but you still need to stay on top of your payments in order to build and protect your credit standing. Whenever you’re making loan payments, education or otherwise, track your credit score regularly (which you can do for free through Credit.com) to make sure you know how your behaviors affect your credit standing. Any sudden drops in scores could mean you made a mistake in repayment or there’s an error on your credit report.
More on Student Loans:
- How Student Loans Can Impact Your Credit
- A Credit Guide for College Graduates
- Strategies for Paying Off Student Loan Debt